Saving Greece, saving us all

Saving Greece is, it seems, a matter of urgency. According to the prevailing line of thought, that means preventing Greece from defaulting and keeping it in the eurozone; it would be catastrophic for the Greeks to fail to meet either objective, and devastating for the rest of Europe. Saving Greece is supposed then to be good for the Greeks and for the rest of Europe. Let’s accept this premise, for the time being, and ask what would make it possible.

Let’s suppose that Greece does manage to restore its public finances in the next three or four years, so that its debt rises no higher than 200% of GDP. That is not a foregone conclusion; the debt currently amounts to nearly 160% of GDP and the budget deficit between January and August 2011 was €18bn (or 9% of GDP). And far from coming down, the budget deficit is still increasing as a result of Greece’s exceptional austerity measures, which have deepened the recession. The economy is projected to contract by 5% in all by the end of the year. The 21% reduction of Greek debts that European banks accepted “voluntarily under pressure” in an agreement on 21 July could help to make the 200% threshold plausible. So the question then is: can any country carry such a long-term debt without society asphyxiating?

Without compulsory measures, soon only EU institutions will have an appetite for holding this debt. As a financial organisation put it: “We do not imagine that investors will return to buy” (1). Any increase in the size of Greece’s debt can only be financed by public lenders, and as securities fall due for renewal, the private sector will leave the task to the European Financial Stability Facility (EFSF) and the International Monetary Fund. Meanwhile, banks and other financial institutions will approve of the European Central Bank (ECB) — going against all its doctrinal instincts — buying up sovereign debt to lessen the burden on them more quickly. Within a few years, Greek debt will be fully owned by the public.